NBFC Sector and Budget 2020

NBFC Sector and Budget 2020

The NBFC sector which has been ailing for quite some time, was expecting some booster shots in the budget 2020. However the Finance Minister preferred to stick to a more conservative regime to address the liquidity constrains of NBFCs and HFCs. The steps announced may not be radical but will set stage for putting the sector back on track, with follow up measure in the coming months. It is but imperative to revive the NBFC sector as it plays an important role in sustaining demand as well as capital formation in medium industrial segments.

The Finance Minister’s announcements for NBFCs were limited to extension of the Partial Credit Guarantee Scheme, which was announced in August 2018, but failed to take off, coupled with increased access of debt recovery mechanism under SARFAESI Act.

The government in August 2018 came up with One time Partial Credit Guarantee Scheme, which provided for one time six months’ partial credit guarantee to Public Sector Banks for first loss of upto 10% in high-rated pooled assets (AA rated) of financially sound NBFCs, amounting to a total of Rupees One lakh crore during the current financial year. The scheme was later modified in December 2019, when the it was extended till 30th June 2020 with an option of allowing a further extension of 3 months . The banks were also allowed to purchase BBB+ Rated assets of NBFC (originally only AA rated assets were allowed), NBFCs which were reported is SMA 0 in the 12 months preceding 1st August 2018 were also included ( Originally only non SMA NBFCs were included) . The Finance Minister in her budget speech said that mechanism would be devised for furthering the scheme, but did not divulge details.

Keeping in view the focus of NBFCs towards granular business and facilitate recovery of smaller assets , the Finance minister announced reduction in eligibility norms for enforcement of SARFAESI Act. The NBFCs eligibility limit for debt recovery under the Act has been reduced from: Rs. 500 crore to Rs 100 crore asset size & Rs. 1 crore to Rs 50 lakh loan size. Which would mean now even small NBFCs can enforce Security interest for smaller ticket loans under SARFAESI Act. This is indeed a welcome step, which will enable easy recovery of stressed by NBFCs, and thus contributing to recovery in their financial health.

This is however still not at par with the Banks who can enforce security interest under the Act for recovery of assets as small as Rs. 1 lakh, and who recovered close to Rs.42000 crores in FY 18-19 through this channel ( as per RBI report on Trends and Progress of Banking in India)

The NBFC sector needs a TARP like programme whereby the government will buy assets of distressed NBFCs on lines of the Troubled Assets Relief Plan (TARP) put in place by US government post the 2007-08 crisis. The same is believed to be in the pipeline and was hinted by RBI Governor in a recent press conference.

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